Investment Highlights

• We maintain our BUY call on Top Glove with a higher fair value of RM13.05/share. The higher FV reflects a lower discount rate (WACC) of 5.9% from 6.4% previously due to the recent decline in Top Glove’s beta from 0.75 to 0.55. At our fair value of RM13.05/share, the implied CY19F P/E is 30.6x.

• We came away from the company briefing feeling positive. The key highlights are:

1. Management is putting more focus into its research and development (R&D) team as well as in process automation and digitalization.

2. Management believes that the trade war between China and the US will not have a significant impact on Top Glove.

3. No impairment on provisional goodwill required upon impairment testing of Aspion. The group will test for impairment annually.

• More focus is being put into its R&D team as management believes this is paramount to a company’s sustainable growth. Top Glove has been less reliant on human labour as the company increased automation in the manufacturing process. The production line can now manufacture an average of 30,000 gloves per hour, with the fastest line rolling out circa 35,000 gloves per hour. This improved cost savings in 4QFY18 PBT by 43% YoY.

• Management believes there will be minimal impact on Top Glove from the US-China trade war. China mainly produces vinyl gloves which contributes to circa 5% to Top Glove’s topline. However, we believe the group is taking this opportunity to move away from China and grow its vinyl gloves production to Vietnam. Top Glove plans to expand its operations to Vietnam and to commence its vinyl gloves factory operation by FY20F.

• The impairment testing for Aspion was done via DCF valuation with an estimated profit projection of RM40mil to RM65mil for FY19F to FY23F. Moving forward, the impairment testing will be done annually. Management believes it will take four to seven years for Aspion to reach the initial expected RM80mil profit level. Presently, Top Glove is focusing on optimizing Aspion factories to improve its efficiency.

Source: AmInvest Research - 18 Oct 2018